Clearfield, Inc. 2017 Q3 Form 10-Q Summary
Business context and reporting period
Clearfield designs, manufactures and distributes fiber-optic management, protection and delivery products for communications networks and provides contract manufacturing services for OEM customers. The filing covers the quarter and nine months ended June 30, 2017, Clearfield’s fiscal third quarter and first nine months of fiscal 2017. Results are unaudited.
Financial performance and position
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Nine months ended June 30, 2017 | Nine months ended June 30, 2016 |
|---|---|---|---|---|
| Net sales | $19.611 million | $21.599 million | $55.529 million | $54.236 million |
| Gross profit | $7.937 million | $9.340 million | $22.589 million | $23.297 million |
| Gross margin | 40.5% | 43.2% | 40.7% | 43.0% |
| Income from operations | $1.323 million | $3.462 million | $3.794 million | $7.585 million |
| Net income | $803,000 | $2.362 million | $2.588 million | $5.342 million |
| Diluted EPS | $0.06 | $0.17 | $0.19 | $0.39 |
- Operating expenses were $6.615 million in the quarter and $18.794 million for the nine months, including increased personnel, stock compensation, product development and legal costs.
- Net cash provided by operating activities was $2.522 million for the first nine months, compared with $6.929 million in the prior-year period.
- Investing activities used $8.286 million, including $13.279 million of investment purchases and $1.631 million for property, equipment and intangible assets.
- Financing activities used $2.502 million, primarily reflecting $2.403 million of common-stock repurchases.
- Cash and cash equivalents were $19.748 million at June 30, 2017. Short-term investments were $5.737 million and long-term investments were $17.153 million, for total cash and investments of approximately $42.638 million.
- Total liabilities were $5.011 million, and the company reported no long-term debt obligations.
- Inventory increased to $9.339 million from $8.373 million at September 30, 2016. Accounts receivable were $8.053 million.
Material changes versus the prior comparable period
- Third-quarter sales declined 9%, primarily because ongoing builds for an Alternative Carrier customer decreased by $2.088 million. Sales to build-to-print and OEM customers also declined.
- First-nine-month sales increased 2%, as higher deployments by Traditional Carrier and Tier 1 customers and stronger international sales more than offset a $3.307 million decline from the Alternative Carrier customer.
- Gross margin declined in both comparison periods because of a higher mix of lower-margin Tier 1 sales and a lower mix of products incorporating optical components, which generally carry higher margins.
- Third-quarter operating income fell approximately 62%, and first-nine-month operating income fell 50%, mainly because of lower gross profit and higher selling, general and administrative expenses.
- Net income declined 66% in the quarter and 52% for the first nine months. The effective tax rate increased to 42.5% in the quarter and 35.0% for the nine months, partly because of unfavorable discrete tax items related to stock-based compensation.
- Cash from operations decreased substantially, partly because of a $2.990 million reduction in accounts payable and accrued expenses, primarily reflecting payment of prior-year bonus accruals.
Guidance, outlook, risks and unusual items
- The filing provides no specific quantitative revenue or earnings guidance. Management states that customer orders are received through periodic purchase orders, limiting visibility into future orders and trends.
- Management expects existing cash, investments and operating cash flow to fund working capital and investment requirements beyond the next 12 months. Cash is intended for organic growth, potential strategic transactions and share repurchases.
- The board increased the share-repurchase authorization from $8.0 million to $12.0 million. The company repurchased $2.403 million of shares during the first nine months and had approximately $8.414 million remaining under the program at June 30, 2017.
- The company recorded a $643,604 impairment charge related to cancellation of an enterprise resource planning software implementation.
- CommScope sued Clearfield in January 2017, alleging infringement of 13 patents covering certain Clearfield products. CommScope seeks injunctive relief and unspecified damages, interest, costs and attorneys’ fees. Clearfield denies infringement and intends to defend the matter, but states that litigation could materially affect its business, results and financial condition.
- Customer concentration remains significant: one customer represented 20% of nine-month sales and another represented 15%; one customer represented 18% of accounts receivable at June 30, 2017.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether reduced Alternative Carrier activity and the lower-margin Tier 1 mix persist or reverse.
- The sustainability of gross margins near 40% after the 2017 decline from approximately 43%.
- Progress and potential financial exposure from the CommScope patent litigation.
- Future cash requirements for inventory, capital expenditures, strategic transactions and the share-repurchase program.
- The effect of higher operating expenses, stock-based compensation and tax-rate variability on earnings conversion and cash flow.
- The extent of customer concentration and the impact of changes in major customer purchasing patterns.